My Presentation on Edelweiss Financial Services – Bangalore Investor Group

I had the privilege to present on Edelweiss Financial Services today at the Bangalore Investor Group (BIG), a community that traces its origins to the ValuePickr forum.

The presentation includes valuations based on conservative and fair value scenarios (Slide 17). All disclaimers on Slide 2 apply.

Valuation on slide 27 is uploaded here:

Google spreadsheet

Valuation methodologies may vary and if you find an error in my numbers, please point it out or comment on the sheet.

Disclaimer: This is a hobby effort and not investment advice.

Short note on Q3 Results of Housing Finance Companies. Will they stage a comeback in 2019?

Q3 results suggest a bottom is in place for Housing Finance cos. Are they set for a comeback?

With 2021 DHFL bonds at 24% YTM, market is pricing a default. It was not a lack of business that crashed the stock price of the leading mortgage provider (450+ to 120) but issues with governance & worries about raising funding and viability as a going concern.

Q3 results of its close private sector competitor – Indiabulls housing also show slowdown in disbursement, once again, not from a lack of demand for mortgage loans – but concerns over ALM.

Sentiment may be bad but the true measure of housing loan demand is from a government financing company that does not have to worry about its failure to raise funds. Q3 results of LIC Housing Finance show a spectacular increase in mortgage AUM and a maintained yoy financial margin of 19%.

Possible Bottom

Further the sell-down of mortgage portfolios to public banks and securitization have helped private players de-risk and raise funds for the post-RERA leg of growth via affordable housing. With the Cobrapost sting, all bad news is in public. Good news is being ignored. Further, there is no palpable distress on the liability side (CP market) as seen in earnings presentations. These signs indicate a possible bottom.

The real estate cycle is said to be of 11-13 years. The property bubble peaked in 2012 but the bottom may be closer than we imagine. Think of affordable housing like small cap and leading indicators that will rally way before home inventories in the main cities start getting back-filled in 2024. We are already in 2019.

At less than 2 forward price to book, the market seems to think mortgage disbursement will keep slowing into the future and loan yields will not rise as fast as bond yields. For the investor these misunderstandings and cyclically depressed valuations may spell opportunity.

Long term opportunities in the Bandhan Bank and Gruh Finance merger

Bandhan Bank merging with Gruh in a share swap deal, is a marriage of east and west. Bandhan Bank is a microlending powerhouse based out of Bengal, while Gruh is a Gujarat based home lending NBFC with HDFC bank pedigree.

The marriage has caused market participants severe indigestion, primarily over valuation concerns. It is a marriage of convenience (Bandhan’s management seeks to dilute its ownership to be in compliance and HDFC seeks to raise capital) but there are more than tactical concerns. So what are the potential long-term benefits that are being ignored?

First, Bandhan, whose motto is “aapka bhala, sabki bhalai” (i.e. for your good and everyone else’s) is a very aggressive and profit-centric bank with a deceiving “not-for-profit” facade.

Bandhan has maintained industry beating NIMs of 10%+. In its recent quarterly results the treasury operations have also scaled and generated 63 times (!) YoY profit growth, in part due to treasury riding positive yield curve movements in AFS and HTM portfolio. This is clearly not a management that let’s an opportunity pass and Gruh’s acquisition will not necessarily prove to be EPS negative (Gruh has lower NIIs but higher ROE than Bandhan)

Second, Bandhan Bank has grown its CASA deposits within just 3 years to an astounding 41%, which is similar to a veteran bank like HDFC! This growing deposit base will help in the future to fund Gruh’s liabilities for long-tenor home lending. No more borrowing for Gruh at premium from debt markets and bank facilities. Gruh’s industry beating home loan underwriting standards will now have the benefit of the Bandhan’s low cost funding. The merged entity will enjoy peerless expertise in both unsecured (primarily Microfinance lending of Bandhan) and secured (collateralized home-lending) loans.

Third, geographical and cross-market synergies have immense potential. East India has a huge and untapped home lending market that could be accessed quickly using Gruh’s underwriting processes. Bandhan is deeply entrenched in this geography, while it has more than a toehold in the West of India (94 branches) and it could use Gruh’s branch network to cross-sell its micro-banking products.

The rural and semi-urban portfolio of the merged entity would be 71%. Bandhan Bank would then cross-sell deposits, microloans and home loans to a bottom of the pyramid clientele.

Additionally, Gruh has a significant wholesale book with its developer/builder lending portfolio. This is an area where a primarily retail lending bank like Bandhan can struggle to build capabilities as has been demonstrated by the recent IL&FS provisioning and write off (gross NPAs have surged YoY in the recent Q3 results). Bandhan will now have capabilities of a full-fledged bank across retail and wholesale portfolios.

Valuation Risks remain and have been noted and priced in by the market. At current market capitalization, Bandhan and Gruh finance have a combined market cap of about 70k crores, which is much more than the expected pro-forma AUM of the merged entity (50k crore). For comparison, Ujjivan and Equitas both currently trade at par or discount to its AUM.

But is it a fair comparison? Ujjivan and Equitas are small finance banks and Bandhan is a full-fledged bank without the restrictions placed on SFBs, which lends to lower costs of lending. Besides, based on past history and its presence in under-penetrated markets, the growth and profitability expectations from Bandhan should be much higher. The market is a voting machine in the short term but a weighing machine in the long term. So let us wait and watch.

Do Indian NBFCs really need new ALM regulations?

The recent crisis in the commercial paper market had put the regulatory spot light on NBFC’s borrow-short, lend-long strategy.

NBFCs effectively leveraged from the low interest CP markets to fund home lending with much longer tenors.

Due to the risk in this popular strategy, the Reserve Bank of India is creating new frameworks and reporting standards to monitor asset-liability mismatches in NBFCs. But can this case of over-regulation be avoided?

Why not simply tailor and extend the NSFR reporting requirement under BASEL III to NBFCs?

The Net Stable Funding Ratio requirement is defined as Available Stable Funding / Required Stable Funding > 1, i.e. the available stable funding sources at the NBFC should always be sufficient to cover said requirement. The stability of different funding sources (such as commercial paper) can then be weighted by the regulator to ensure an ideal mix.

NSFR therefore can be a simple metric to monitor stability of liquidity available to NBFCs. Good financial regulation is meant to be light yet effective. You can read more about the NSFR here:  https://www.bis.org/fsi/fsisummaries/nsfr.htm

NSFR implementation will also save NBFCs the costs of finally transitioning to a deposit taking Small Bank, under the RBI’s Small Bank License, which is the usual end goal for many NBFCs.

Just food for thought.

Arman Financial Services: thoughts on quarterly results and future direction

This post is not BUY/SELL/HOLD advice but a statement of my personal views and opinion on the latest results. I own stocks of Arman Financial Services and my views are biased.

Arman Financial Services is a Gujarat based NBFC with a presence in two-wheeler financing, microfinance & SME lending. By the name Arman Financial Services Limited “AFSL” (NSE: ARMANFIN) caters to two-wheeler finance and SME lending. By the name Namra Financial – a subsidiary of AFSL – the group caters to Micro-finance lending across Gujarat, Maharashtra, M.P, U.P and Uttarakhand.

What is my interest in the company?

  • I own 0.06% of its non-class A, public shares. No really. It is my moonshot
  • As some one who tracks the microlending sector closely, I have written about the Microfinance Sector and have been a believer that it will emerge stronger after demonetization

Investment Thesis

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